Question

X and Y are partners in a firm sharing profits and losses in the ratio of 5 : 3. On 31st March 2024, their Balance Sheet was as under:

Liabilities	₹	₹	Assets	₹
Creditors		50,000	Bank	29,000
Provident Fund		15,000	Debtors	1,80,000
Workmen's Compensation Reserve		40,000	Stock	1,25,000
Capital Accounts:			Premises	1,50,000
X	2,60,000		Advertisement Expenses	16,000
Y	1,35,000	3,95,000
		5,00,000		5,00,000

On 1st April, 2024, Z is admitted as a partner. X surrenders `1/4`th of his share and Y `1/3`rd of his share in favour of Z. Goodwill is valued at ₹ 1,60,000. Z brings in only `2/5`th of his share of goodwill in cash and ₹ 1,50,000 as his capital. Following terms are agreed upon:

1. Premises is to be increased to ₹ 2,00,000 and stock by ₹ 5,000.
2. Creditors proved at ₹ 60,000, one bill for goods purchased having been omitted from the books.
3. Outstanding rent amounted to ₹ 12,000 and prepaid salaries ₹ 2,000.
4. Liability on account of provident fund was only ₹ 10,000.
5. Liability for Workmen's Compensation Claim was ₹ 16,000.

Prepare Revaluation A/c, Capital A/cs and the opening Balance Sheet. Also calculate the new profit sharing ratios.

Hint: Premium for Goodwill A/c will be debited by ₹ 18,000 and Current Account of Z will be debited by ₹ 27,000 and Capital Accounts of X and Y will be credited in the sacrificing ratio of 5 : 4.

Answer 1

Revaluation Account
Particulars	Amount (₹)	Amount (₹)	Particulars	Amount (₹)
To Creditors (Omitted Bill)		10,000	By Premises (₹ 2,00,000 − ₹ 1,50,000)	50,000
To Outstanding Rent		12,000	By Stock (Increase)	5,000
To Profit transferred to:			By Prepaid Salaries	2,000
X's Capital A/c (5/8):	25,000		By Provident Fund (₹ 15,000 − ₹ 10,000)	5,000
Y's Capital A/c (3/8):	15,000	40,000
		62,000		62,000

 

Partners' Capital Accounts
Particulars	X (₹)	Y (₹)	Z (₹)	Particulars	X (₹)	Y (₹)	Z (₹)
To Advt. Exp.	10,000	6,000	-	By Balance b/d	2,60,000	1,35,000	-
				By Bank A/c	-	-	1,50,000
				By WCR (Excess)	15,000	9,000	-
				By Revaluation Profit	25,000	15,000	-
				By Premium for GW	10,000	8,000	-
To Balance c/d	3,15,000	1,73,000	1,50,000	By Z's Current A/c	15,000	12,000
Total	3,25,000	1,79,000	1,50,000	Total	3,25,000	1,79,000	1,50,000

 

Opening Balance Sheet as on 1st April, 2024
Liabilities	Amount (₹)	Amount (₹)	Assets	Amount (₹)
Creditors (₹ 50,000 + ₹ 10,000)		60,000	Bank (₹ 29,000 + ₹ 1,50,000 + ₹ 18,000)	1,97,000
Provident Fund		10,000	Debtors	1,80,000
Outstanding Rent		12,000	Stock (₹ 1,25,000 + ₹ 5,000)	1,30,000
Workmen's Comp. Claim		16,000	Premises	2,00,000
Capital Accounts:			Prepaid Salaries	2,000
X:	3,15,000		Z's Current Account	27,000
Y:	1,73,000
Z:	1,50,000	6,38,000
Total		7,36,000	Total	7,36,000

Working Note:

A. New Profit Sharing Ratio & Sacrificing Ratio

Old Ratio (X : Y): 5 : 3

X's Sacrifice: `5/8 xx 1/4 = 5/32`

Y's Sacrifice: `3/8 xx 1/3 = 1/8 = 4/32`

Sacrificing Ratio (X : Y): 5 : 4

Z's Share: `5/32 + 4/32 = 9/32`

New Shares:

X's New Share: `5/8 - 5/32 = (20 - 5)/32 = 15/32`

Y's New Share: `3/8 - 4/32 = (12 - 4)/32 = 8/32`

New Profit Sharing Ratio (X : Y : Z): 15 : 8 : 9

B. Treatment of Goodwill

Total Goodwill of the firm = ₹ 1,60,000

Z's Share of Goodwill = `₹ 1,60,000 xx 9/32 = ₹ 45,000`

Brought in cash (Premium): `45,000 xx 2/5 = 18,000`

Adjusted via Z's Current A/c: `45,000 xx 3/5 = 27,000`

Distribution to X and Y (in 5 : 4 Sacrificing Ratio)

X: `45,000 xx 5/9 = 25,000`

Y: `45,000 xx 4/9 = 20,000`

C. Distribution of Reserves & Accumulated Losses

Workmen's Compensation Reserve (WCR): Total reserve is ₹ 40,000, and the claim is ₹ 16,000. The excess ₹ 24,000 is distributed to old partners in their old ratio (5 : 3):

X: ₹ 15,000 and Y: ₹ 6,000